APPLIED ECONOMICS NOTES

COMPARATIVE ECONOMIC SYSTEMS

Capitalism and its features
Capitalism is an economic system in which there is private ownership of the means of
production and distribution. It discourages Government intervention where production
and prices are set by a central decision-making body.
The theoretical framework of capitalism is the Classical economics Free Market
model of economists like Adam Smith and David Ricardo. They advocated the free
Market mechanism where the invisible hand of demand and supply allocate resources. In
a capitalist market economy, decision making and investment is determined by the
owners of the factors of production in financial and capital markets, and prices and the
distribution of goods are mainly determined by competition in the market.
Capitalism in line with the classical economic reasoning advocates promotion of
individual interest as against collective interest. The thinking is that as individuals pursue
their interests, uninterrupted by any government intervention, efficiency and productivity
increases therefore driving the economy towards full employment and economic growth
The major assumptions of the classical are
i. There is no government intervention in the economy
ii. Automatic adjustment towards full employment in the long run
iii. Free movement of factors of production

. The following are the characteristics of capitalism;

1. Private ownership of means of production: Individuals have the right to own private
property such as land, buildings and capital.
2. The use of the price mechanism to allocate resources between competing uses.
Prices of goods and services such as foreign exchange, stock prices, and
commodities price are not dictated by central authority but Self-regulating and self-
adjusting by the forces of demand and supply which Adam Smith referred to as
“invisible hand”

3. Competitive markets. Each firm in the capitalist economy tries to out-do the other in
terms of gaining a larger market share. This can take the form of price cuts to attract
customers or other selling activities such as advertising.
4. Profit Motive. This is the main motive driving the capitalist economy. In the words
of Adam Smith, “It is not to the benevolence of the baker but to his self-interest that
we owe our brad”. As Individuals are allowed to pursue their interest, aggregate
wealth is maximized.
5. Free-enterprise This is also referred to as Laissez-faire. The Capitalist economy is a
free market economy where very one is free to get into any legal form of business of
interest. As he wishes without any restriction.. In this case, individual interest
subsists

6. Little government intervention Capitalism is opposed to government intervention

in the economic life of the people. There absence of government regulation in the
economy
7. Consumer Sovereignty The consumer is the target of the competition among
firms in the capitalist economy not necessarily for the interest of the consumer but in
 the interest of the capitalists. Every form tries to satisfy the consumers in every way
possible just as the consumers try to maximize their utilities.

Merits of Capitalism
1. Higher efficiency and incentive to work. Self-interest is believed to propel
both entrepreneurs and works to be more efficient through hard work to earn
higher profits and wages respectively

2. Higher rate of Capital Accumulation Free market enterprise permit people to

continue to save and to acquire more wealth. This is leads to higher capital
formation.

3. Optimum Utilization of resources. Market mechanism is also believed to

guarantee optimum allocation as resources are allocated to their best uses with
little waste

4. Just System The richest reward goes to the ablest, the most daring as well as the
most prudent entrepreneur who has initiative and shows extra ordinary
resourcefulness.

5. Profit Motive also encourages enterprise and risk taking.

Demerits of Capitalism

1. Wasteful competition This takes the form of wasteful advertising and

salesmanship to secure a market size

2. It ignored Human welfare. It promotes the interest of the strong and mighty an
the society to the detriment of the weak and vulnerable. It is not geared towards
production if public goods.
3. Property rights take precedence over human rights
4. Misallocation of Resources Economic resources do not go to those who need
them most but to those who have the purchasing power
5. Creation of social classes and widening of gap between the rich and the poor.

There is no country in the world that can be said to be a pure capitalist country, not
even in the United States of America that appears to have the most capitalistic economy
in the world. There are all kinds of market imperfections which distort market prices
resulting in misallocation or less than optimal resource allocation (Olofin, 2001).
Real world capitalist systems are fraught with different measures and modifications
aimed at improvement of the performance of the capitalist economic system. Some of
these include substantial public ownership of means of production, social welfare
programs, indirect Government regulations of the level of economic activities through
fiscal and monetary policies, provision of information to supplement market information,
direct legislation to fight noncompetitive features in the market economies Other
Government involvement include direct involvement in resource allocation and
production of goods and services, indirect government intervention in improve income
distribution pattern through tax and wage legislation and tariff manipulation and subsidies
to name a few. Nowadays, it has become a regular practice for Government to embark on
large scale intervention in form of economic planning. The introduction of these and
other measures partly account for the so called mixed economies which are neither pure
capitalist nor pure socialist command economies.

Socialism
Socialism began as a reaction to the development of capitalism in Western Europe
following the industrial revolution which led to the development of capitalist class. It was
popularized by Karl Marx who propounded several theories in opposition to the rise of
capitalism. To him, capitalism was exploitative and served only the interest of the
capitalists or bourgeoisies who were the owners of the means of production. Among the
theories were the Surplus value Theory and the theory of capital accumulation.
To Marx, the profit (Surplus) experienced by the capitalist from their investment
was not from the raw material or machinery used but from the surplus labor which the
worker was forced to supply. According to him, the value received by the worker, for the
labour supplied is less than the value of labour supplied. Marx called this surplus value.
In his theory of capital Accumulation, he maintained that it was surplus labour that lead
to capital accumulation. According to Marx the continuous exploitation of the worker’s
labour by the capitalists would lead to a revolution which he termed the ‘Proletariat
revolution” that result in the overthrown of the capitalist system. Marx sees the capitalist
as a sorcerer whose incantation would invoke certain forces that he would not be able to
handle. Therefore he predicted that the inherent contradiction in the capitalist system will
eventually lead to the collapse of the system. The emergence of socialist states such as
USSR and the Chinses Communist party came to prove Marx a prophet.
He advocated violent revolution for the overthrow of the capitalist and the
entrenchment of an egalitarian society which would eventually lead to a class-less society
and ultimately a stateless society called communism which according to him is the ideal
form of society. Marx believed that the state is an instrument in the hands of the
bourgeoisie to perpetuate the exploitation of the poor.
Even though a number of countries have toed the line of Marx thinking, it is
difficult to say if these countries have actually practiced pure socialism as socialism is
seen by different people from different perspectives. Socialism has been described as
both concrete and abstract, theoretical yet practical, very old yet entirely modern, an
interpretation of the past yet a vision for the future, a popular movement yet a scientific
analysis, a violent revolution, yet a gentle revolution, a gospel of love and hatred, a
societal code of ethics expected of any society, a philosophy of life, a sort of religion and
the hope of mankind (Otaha, 2012)
Socialism is an economic and political system based on public or collective
ownership of the means of production. It promotes collective interest as against
individual interest. The decisions as to how much to produce, which methods of
production to employ and for whom to produce are taken by the planning authority. That
is why a socialist economy is also called a centrally planned economy. Socialism
promotes social welfare as against profit motive. China, Vietnam, North Korea and Cuba
are examples of modern-day socialist societies. Twentieth-century socialist governments
were overthrown in Czechoslovakia, East Germany and the U.S.S.R.

We shall now examine the features of socialism. The main features of this system are
detailed below.
 (1) Public Ownership:

There is collective ownership whereby all mines, farms, factories, financial institutions,
distributing agencies (internal and external trade, shops, stores, etc.), means of transport
and communications, etc. are owned, controlled, and regulated by government
departments and state corporations.

(2) No Private Enterprise: Large private businesses do not exist. However, in Agriculture
and other basic industries, small business units which are carried on in the villages by
local artisans for local consumption may be permitted.

(3) Central Planning:

A socialist economy is centrally planned which functions under the direction of a central
planning authority. It lays down the various objectives and targets to be achieved during
the plan period. Central economic planning means ―the making of major economic
decisions of what and how much is to be produced, how, when and where it is to be
produced, and to whom it is to be allocated for by the conscious decision of a determinate
authority, on the basis of a comprehensive survey of the economic system as a whole.‖
And the central planning authority organizes and utilizes the economic resources by
deliberate direction and control of the economy for the purpose of achieving definite
objectives and targets laid down in the plan during a specified period of time.

(4) Freedom of Consumption:

Under socialism, consumers ‘sovereignty implies that production in state owned

industries is generally governed by the preferences of consumers, and the available
commodities are distributed to the consumers at fixed prices through the state-run
department stores. Consumers ‘sovereignty under socialism is confined to the choice of
socially useful commodities.

(5) Equality of Income Distribution:

In a socialist economy, there is great equality of income distribution as compared with a

free market economy. The elimination of private ownership in the means of production,
private capital accumulation, and profit motive under socialism prevent the amassing of
large wealth in the hands of a few rich persons. Even though no perfect economic
equality is guaranteed in Socialism, inequality is not to be glaring. Perfect equality is not
the aim of socialism but social justice in the distribution of national income.

(6) Planning and the Pricing Process:

The pricing process under socialism does not operate freely but works under the control
and regulation of the central planning authority. There are administered prices which are
fixed by the central planning authority. There are also the market prices at which
consumer goods are sold. There are also the accountings prices on the basis of which the
managers decide about the production of consumer goods and investment goods, and also
about the choice of production methods.

(7) Social Welfare and Social Security: The motive of production is to improve social
welfare and not for profit. To this end the state aims at ameliorating the lot of the
common man by providing him and his family with adequate medical aid, full and free
education, food etc,
(8) Class-Less Society.

The following are the advantages of socialism as advanced by Prof, Schumpeter.

Merits of Socialism:

(1) Greater Economic Efficiency:

Economic efficiency under socialism is greater than under capitalism. The means of
production are controlled and regulated by the central planning authority towards chosen
ends. The central planning authority makes an exhaustive survey of resources and utilizes
them in the most efficient manner. Economic efficiency is also achieved by utilizing
resources in producing socially useful goods and services which satisfy the basic wants of
the people, like cheap food, cloth, and housing. This also connotes efficiency in resource
allocation.

(2) Greater Welfare due to Less Inequality of Income:

In a socialist economy there is less inequality of income as compared with a capitalist

economy because of the absence of private ownership of the means of production, private
capital accumulation, and private profit. All citizens work for the welfare of the state and
each is paid his remuneration according to his ability, education and training. All rents,
interests and profits from various sources go to the state which spends them for public
welfare in providing free education, cheap and congenial housing, free public health
amenities, and social security to the people.

(3) Absence of Monopolistic Practices:

Another advantage of socialism is that it is free from monopolistic practices to be found

in a capitalist society. Since under socialism all means of production are owned by the
state, both competition and monopoly are eliminated. The exploitation by the
monopolistic is absent. Instead of private monopoly, there is the state monopoly of the
productive system but this is operated for the welfare of the people. In the state-owned
factories, socially useful commodities are produced which are of high quality and are also
reasonably priced.

(4) Absence of Business Fluctuations:

A socialist economy is free from business fluctuations. There is economic stability

because production and consumption of goods and services are regulated by the central
planning authority in accordance with the objectives, targets and priorities of the plan.
Thus there is neither overproduction nor unemployment.
(5) There is no wastage that may arise due to competition as may be the case with
Capitalism.

Demerits of Socialism:
A socialist economy has also certain disadvantages:

1. Loss of Consumers’ Sovereignty:

There is loss of consumers‘sovereignty in a socialist economy. Consumers do not have

the freedom to buy whatever commodities they want. They can consume only those
commodities which are available in department stores. Often the quantities which they
can buy are fixed by the state.

2. No Freedom of Occupation:

There is also no freedom of occupation in such a society. Every person is provided job by
the state. But he cannot leave or change it. Even the place of work is allotted by the state.
All occupational movements are sanctioned by the state.

3. Inefficiency in production due to lack of personal interest and absence of competition.

4. Bureaucracy:

A socialist economy is said to be a bureaucratic economy. It is operated like a machine.

So it does not provide the necessary initiative to the people to work hard. People work
due to the fear of higher authorities and not for any personal gain or self-interest. There is
no doubt that a socialist economy is better than a capitalist economy because of its
overwhelming merits. But it is disliked for the loss of political, economic and personal
freedoms.
Socialism was believed to be an economic system in the continuum whose
ultimate result is the communist state where the state will be overthrown. No country has
however ever achieved the communist society.
It should be noted that countries which have adopted socialism have not made any
progress that is significantly better than the capitalist countries. As a matter of fact some
of them are still relatively poor compared to western countries that are strong capitalist
economies. Countries like Cuba and North Korea are still relatively poorer countries.
Some of the countries that have been strong socialist countries like China can be
said to have achieved some economic breakthrough as a result of their openness to
international capitalism.

Mixed economy and its features

A mixed economy is variously defined as an economic system consisting of a

mixture of Markets and economic planning, public ownership and private ownership, or
free markets and economic interventionism. However, in most cases, "mixed economy"
refers to market economies with strong regulatory oversight and governmental provision
of public goods, although some mixed economies also feature a number of state-run
enterprises. In general the mixed economy is characterized by the private ownership of
the means of production, the dominance of markets for economic coordination, with
profit-seeking enterprise and the accumulation of capital remaining the fundamental
driving force behind economic activity. But unlike a free-market economy, the
government would wield indirect macroeconomic influence over the economy through
fiscal and monetary policies designed to counteract economic downturns and capitalism's
tendency toward financial crises, unemployment, and growing income and wealth
disparities, along with playing a role in interventions that promote social welfare.
Subsequently, some mixed economies have expanded in scope to include a role for
indicative economic planning and or large public enterprise sectors.
As noted earlier both capitalism and socialism are more theoretical and ideological
than practical as one can hardly find a perfect socialist state or a perfect capitalist state.
Almost every country in the world rather has a form of mixed economic system for the
following reasons
1. Even the most advance capitalist states like the USA have elements of central
planning and control of the economy through Monetary and fiscal policies.
2. Most socialist countries in the world have embraced some elements of free market
economy and private property ownership while maintaining a firmer central
control of the economy.
3. Most third world countries, especially in Africa decided not align with either the
socialist block or capitalist block in what was popularly referred to as the Non--
Aligned Movement. They all have a form of mixed economic system.

There is mixture of private and public ownership of the means of production and
distribution. Some decisions are taken by households and firms and some by the planning
authority. All developing countries like India and Nigeria are mixed economies.

Features of mixed economy

Existence of the Public
Sector:
This is where the state makes decisions regarding Public utilities, such as rail
construction, road building, canals, power supply, means of communication, etc.,. They
are operated for public welfare and not for profit motive. The public sector also operates
basic, heavy, and strategic and defense production industries which require large
investment and have long gestation period. But they earn profits like private industries
which are utilized for capital formation. An example is the Nigerian railway corporation
and the Transmission Company of Nigeria (TCN)

2. Private Sector:
There is a private sector in which production and distribution of goods and services are
done by private enterprises. This sector operates in farming, plantations, mines, internal
and external trade, and in the manufacture of consumer goods and some capital goods.
This sector operates under state regulations in the interest of public welfare. In certain
fields of production, both public and private sectors operate in a competitive spirit. This
is again in the interest of the society.
3. Joint Sector:
A mixed economy also has a joint sector which is run jointly by the state i.e public and
private enterprises. It is organized on the basis of a joint stock company where the
majority shares are held by the state. A good example is the NNPC Ltd and the Dangote
Refinery.

4. Cooperative Sector:
Under a mixed economy, a sector is formed on cooperative principles. The state provides
financial assistance to the people for organizing cooperative societies, usually in dairying,
storage, processing, farming, and purchase of consumer goods.

5. Freedom and Control:

A mixed economy possesses the freedom to hold private property, to earn profit, to
consume, produce and distribute, and to have any occupation. But if these freedoms
adversely affect public welfare, they are regulated and controlled by the state.

6. Economic Planning:
There is a central planning authority in a mixed economy. A mixed economy operates on
the basis of some economic plan. All sectors of the economy function according to the
objectives, priorities and targets laid down in the plan. In order to fulfill them, the state
regulates the economy through various monetary, fiscal and direct control measures. The
aim is to check the evils of the price mechanism.
7. Social Welfare:
The principal aim of a mixed economy is to maximize social welfare. This feature
incorporates the merits of socialism and avoids the demerits of capitalism. To remove
inequalities of income and wealth, and unemployment and poverty, such socially useful
measures as social security, public works, etc. are adopted to help the poor. On the other
hand, restrictions are placed on the concentration of monopoly and economic power in
the hands of the rich through various fiscal and direct control measures. We shall again
consider the merits and demerits of mixed economic system.

Merits of Mixed Economy are:

(1) It has best allocation of resources:

(2) There is a general balance between the public sector and the private sector
(3) It is a welfare state:
(4) There is presence of Social security
(5) There is freedom criticism by the citizen

Demerits of Mixed Economy are

A mixed economy also has certain defects which are stated below:
(1) Non-Cooperation between the Two Sectors
(2) Inefficient Public Sector
(3) Economic Fluctuations is inevitable
(4) Decision making can be hampered or delayed
(5) Resources may not be evenly distributed
Therefore, let it be known to you that a mixed economy contains all the features of a
welfare state. There is no exploitation either by the capitalists as under a free enterprise
economy or by the state as under a socialist economy. The United States, Nigeria and
India are said to have a mixed economic system because privately owned businesses and
government both play important roles in the economy.